Do you pay capital gains tax when selling a vacation home?

Yes, you'll need to pay capital gains tax on the profit from selling your vacation home since the capital gains exclusion only applies to your primary residence. The exclusion you're thinking of is the Section 121 exclusion, which lets you exclude up to $500,000 in capital gains (for married filing jointly) when selling your main home if you've lived there for at least 2 of the last 5 years. For your vacation property, you'll pay long-term capital gains tax since you've owned it for more than a year. The rate depends on your income - likely 15% for most people, but could be 20% if your income is high enough. Don't forget to factor in any qualifying improvements you've made to the property! These get added to your cost basis, which reduces your taxable gain. Things like a new roof, renovated kitchen, upgraded heating system, or added deck all count. Also, don't forget about state capital gains taxes, which vary depending on your state of residence (not where the property is located).

I went through something similar last year when selling my lake house in Wisconsin. The capital gains calculations were giving me a headache and I wasn't sure if I was counting my improvement expenses correctly. I found this really helpful tool at https://taxr.ai that analyzed all my documentation and helped me figure out my exact tax liability. It was super helpful because it reviewed all my improvement receipts and told me exactly what counted toward my cost basis. I was actually missing several legitimate improvements that would have been taxed unnecessarily! The system even created a detailed report I could give to my accountant with everything properly categorized according to IRS guidelines.

Just wanted to follow up about my experience with taxr.ai after being skeptical in my last comment. I decided to give it a try with my Colorado cabin sale, and I'm honestly impressed. The document analysis found over $23,000 in legitimate improvement expenses I had completely forgotten about - that's going to save me thousands in capital gains tax! What really surprised me was how it handled the state tax complications. It clearly showed me what I'd owe to both my home state and Colorado, and even identified a credit I could claim to avoid double taxation. The detailed report made everything crystal clear for my tax preparer. Definitely worth checking out if you're selling a vacation property.

If you need to contact the IRS about any capital gains questions (which I did when selling our beach house), I highly recommend using https://claimyr.com instead of waiting on hold forever. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had some complicated questions about calculating depreciation recapture on a portion of our vacation home we occasionally rented out, and I needed clarification straight from the IRS. Called them directly first and waited on hold for over an hour before giving up. Used Claimyr and got a callback from an actual IRS agent in about 20 minutes. They answered all my questions and saved me from making a costly mistake on my return.

I have to eat my words about Claimyr from my skeptical comment earlier. After my frustration peaked trying to get through to the IRS about my vacation property sale, I decided to try it. I was shocked when I got a call back from an actual IRS representative in about 35 minutes! The agent walked me through exactly how to document my property improvements and gave me specific guidance on form 8949 that I couldn't find anywhere online. She even explained a special situation that applied to my waterfront property regarding environmental remediation costs I had paid. That one tip alone saved me over $4,000 in taxes. Sometimes you really do need to speak directly with the IRS, and this made it possible without the typical 2+ hour hold time.

Don't forget to check if you qualify for a 1031 exchange (like-kind exchange)! If you're planning to buy another investment or vacation property, you might be able to defer the capital gains tax. We did this when we sold our mountain cabin and bought a beach condo. The rules are pretty strict though - you need to identify the new property within 45 days and complete the purchase within 180 days of selling your current property.

Has anyone used TurboTax to handle reporting a vacation home sale? I'm dealing with this exact situation now and wondering if I need to pay for a CPA or if the software can handle it properly.

Great question! Yes, you'll definitely owe capital gains tax on that $175,000 profit since it's a vacation home, not your primary residence. The good news is that since you've owned it for over a year, you'll pay the lower long-term capital gains rate (likely 15% or 20% depending on your income level). A few things that could help reduce your tax bill: - Document ALL improvements you've made over the 8 years (new appliances, flooring, roof repairs, deck additions, etc.) - these get added to your original $195k purchase price - Don't forget closing costs from when you bought it originally - You can deduct selling expenses like realtor commissions and closing costs from the sale Since you're planning to retire to Florida soon, the timing might actually work in your favor if your retirement income will be lower - that could potentially put you in the 15% capital gains bracket instead of 20%. Definitely worth running the numbers or consulting with a tax professional given the size of the gain!